Small Cap Value Report (Weds 16 Feb 2022) - FLTA, FRAN, RAI, OOUT, ARBB

16th Feb '22 by Jack Brumby

36 comments 8495 reads

Good morning, it's Jack & Roland here with Wednesday's SCVR. Paul's off for a couple of days while the news flow is quieter. If you see anything of interest leave us a comment and we'll see if we can get around to it.

Agenda

Jack's section:

Ra International (LON:RAI) - H2 Covid disruption means FY EBITDA has halved to $7m. The order book has also dropped by 50% year-on-year due to delays to contracts, and the group is moving away from commercial opportunities as a result. The valuation looks cheap on the face of it, and trading could recover, but the shares are illiquid and the update lacks detail, so I’m happy to remain on the sidelines for now as it looks high risk.

Ocean Outdoor (LON:OOUT) - an encouraging rebound in trading for this digital out of home specialist. The group has spent an awful lot of money on acquisitions, and Covid has obviously had an impact, so underlying progress is difficult to gauge. It could be that an enlarged group is poised to rapidly become much more profitable, but it remains a relatively unknown entity for me so I’m currently neutral. There's an ongoing strategic review as well and the company has received offers for a potential sale, so we could hear news on that front at some point.

Roland's section

Filta Group (LON:FLTA) - a recommended all-share offer from Franchise Brands (LON:FRAN) values Filta at a shade under 171p and looks almost certain to succeed. I think this could be a logical and reasonably priced deal, assuming both businesses are able to maintain historic rates of growth.

Arbuthnot Banking (LON:ARBB) - this unusual family-controlled banking group has issued a brief trading statement confirming a strong end to 2022. The Stockopedia metrics present a mixed picture, but I think the group’s record suggests it might be worth further research for patient long-term investors.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty.…

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Chrisfarrell21

16th Feb '22

KISTOS - I like the way that referring to one of the Big 4 is supposed to give some sort of credibility/prestige to this, but they are some of the most self-serving/turn-a-blind-eye businesses going - see any of the audit failures/fines/lack-of-change in the last decade!

Mgt.'s excuse for not telling us about the start of the measurement period on 21 May 2021 (!!) was that they've "substantially been in a closed period". I don't buy this at all. Firstly, use of 'substantially' means they weren't in a closed period for that time. Secondly, my (very limited) understanding of a closed period, it doesn't prevent you from properly disclosing price sensitive information - which this is.

I can't tell what it says about mgt.. In my view, it says either:

they (and their advisors) are totally ****ing clueless, were surprised by the reaction, and might have to have a rethink (they won't); or
they are totally ****ing greedy, and knew exactly what they were doing, hoped people wouldn't kick up a fuss, but worded the original statement and took some actions to make it seem credible (PWC)/subject to change ("intention to establish").

If I was a shareholder, I'd sell. If I was an employee, I'd leave. As rmillaree points out, there's only 3 of them in the scheme! Hardly bringing the company together. What would you think if you were in charge of one of their licence interests, i.e. a person responsible for exceptional performance?!

I wish they'd just brazened it out rather than put out this nonsense today.

Happy Wednesday.

Chris

Gnome2

Re: Gear4music Holdings (LON:G4M)

Sorry, I don't have an obvious answer for you but I did add to my already overweight position! The company's an odd one. It seems to polarize views a bit. I think there are a lot of solid holders who believe in the company's long term future and then there are those who are trading momentum. There must be a lot of PIs who multi-bagged on the last upswing and are looking to protect some profits as they see it fall. The price has fallen on relatively small volumes, especially when you consider that Liontrust bought 10% of the company at £7-30 about 3 weeks ago! Do this small group of PIs know something that we don't. I suspect not.

Bouden54

Gear4music Holdings (LON:G4M) starting to look interesting now. Not sure why its down around 25% in a month on no new news. They did around 60p EPS in 21 - that was clearly an exceptional year, but if they can sort out the issues in Europe then they should be able to get back towards that and the company would then look very cheap.

oliver elliott

Would just like to thank Paul,Heather, and David for the open invite to their Share shindig yesterday evening.

What a great evening, All the best, the markets are up , the sun is shinning,top night out, doesn't get much better than that.

davidjhill

Hi 55555 - the problem with Gear4music Holdings (LON:G4M) and many other small to mid caps is liquidity. Given the uncertain geopolitical backdrop we are seeing that MM's are not really offering liquidity at the moment. Instead they are acting almost like brokers, trying to "match" bargains. This means that tiny trades have a disproportionate impact on price (and thus market cap). Lowering their price panics other small retail holders into selling and drops the price a bit further. The volume last few days has been minute.

To put it into context - one day recently there was £100k worth of shares traded. The market cap of the company dropped by £10m!

In times like this you have to be very clear on your investment strategy. If you are not prepared to invest in a stock like this for 3-4 years then I'd think very carefully about owning it at all because small weak hands can, as we see here with Gear4music Holdings (LON:G4M) ,cause disproportionate drops. Retail investors often lose money because they buy high and sell low, which is the wrong way round.

I hold Gear4music Holdings (LON:G4M) and am expecting to do so for the next 3-5 years. On that basis I have to think about annual compounding returns. The minimum I expect is 12% p/a so I need the share price to return me a 75% profit over 5 years to even come onto my radar. Given the operational gearing I expect the company to generate 40p of EPS next year and in excess of 60p within 3 years. On that basis at a reasonable PE of 17 or 18 I anticipate £11+ thus am happy to hold here. Liontrust will have done the same calcs and clearly also see value at £7.30. Of course none of us can predict exactly what the future holds, particularly external macro or geopolitical factors, that may affect the company so nothing is certain. The key is to reassess each time the company reports to determine if the investment logic still remains valid.

55555

Hi David, that’s really helpful and informative. Thank you, and the others, for taking the time to help, what you say makes perfect sense.

Couldnt agree more - who knows what will happen to Gear4music Holdings (LON:G4M) share price in short term, but on a 2-3 year view this looks pretty safe bet to roughly double your money.

Boon

Good read-across from Ocean Outdoor (LON:OOUT) strong recent trading, to Spaceandpeople (LON:SAL) . While the product is different (DOOH vs physical kiosks / marketing spaces) both are ways to do offline marketing, in high footfall areas. Both types of marketing activities come from usually the same marketing budget pots within companies, and are both included in the same campaign plans.

For what is worth, my two cents is that there's some exciting stuff happening in Digital OOH advertising over the next few years. Potentially we might see ways to track and measure performance to sales (which isn't possible with standard OOH) but might be with DOOH. However, there are still privacy hurdles to jump through and no-one has a viable scalable solution/product yet, but whoever does will be a 10x multi-bagger or more.

(I hold Spaceandpeople (LON:SAL) )

Howard Adams

As it seems to be a bit of slow news day I thought I'd pick up on the Tesla ($TSLA) conversation we all had a few weeks ago (obviously not a UK small cap though) (I hold $TSLA).

The macro influences around going green and thus EV's are significant and ripple into all parts of our lives and thus our investment portfolios.

If you invest in motor dealers EVs effect these. Our demands for energy sources will be effected by adoption rates of EVs. Our personal finances will be effected by prices of EVs and their running and maintenance costs. Petrol station distribution systems versus EV charging stations are central, thus companies like Shell and BP are effected (we have a newly build EV only charging station here in SW6 which replaced an existing Shell petrol station). Our day to day movements are effected by EVs with the City low emission zones. Here is the new EV charging station near me ..... (BTW it is often well over 50% full when I walk by which is quite often).

If you have an interest in the EV companies and the evolving technology, this video is a pretty comprehensive presentation of multiple aspects of this space.

It explores vehicle prices, production costs, running costs, market and adoption growth rates, different technological solutions (battery swapping vs charging), different EV manufacturers. The Vlogger draws heavily on ARK Invest research but also uses his own in depth research of this space and innovation in general.

It's 19 mins (and expect not to everyone's tastes, but some might like it). The Vlogger has a strong technical/engineering background and does in depth research (clearly a few Americanisms are present)

Regards

Howard

BnB

Good post Howard and a vital theme for the future. I play it by investing in related semiconductor stocks (Infineon, Qualcomm etc) charging infrastructure (ABB, Alfen etc) and cable suppliers (Volex et al).

Wimbledonsprinter

Yes. A very enjoyable evening and thanks to Heather and David for organiaing. It was a pleasure meeting you too Oliver.

Helvellyn

Howard,

I cannot see a link to the vid .

Richard

Richard Goodwin

Ra International (LON:RAI) reading between the lines I suggest that Mozambique is a huge issue. It has absorbed a huge amount of working capital and Total shows no sign of returning whilst the area remain troubled. presumably they have declared fore majeure on any payments. They quid pro quo on RAI getting high rewards for what in the west would be low margin business is that they take the political risk and this particular chicken has come home to roost. This accounts for 60% of the order book reduction.

From interim results "Given the ongoing uncertainty in Cabo Delgado province, Mozambique, we have excluded the USD 60.5m contract to provide IFM services in this region and reset the order book to USD 129m as at 30 June 2021."

Secondly it is quite possible that the second big expectation, Danakali is having an issue. They expect it to be another huge project. From interim results "during the period we agreed commercial terms with Danakali Limited for the construction of a 1,200 person camp facility and to provide IFM services."

Hi Dicktrade

Sorry, not sure why it disappeared,

Hi Again Dicktrade

The link has disappeared again ???

I'll try this approach.

This is the Vlogger's channel

https://www.youtube.com/channe...

The vid I'm referring to is this one

It should be right the first one you see in his list.

Sorry for not being able to give the full link

Thank you for your perseverance Howard !!

Arbuthnot Banking (LON:ARBB) is a tricky one. I looked at it a couple of years ago, and they seem to be in the process of building up the lending side of their business, setting up lots of specialist lending divisions (property finance, asset finance, etc) . At the moment these aren't particularly profitable, hence Arbuthnott doesn't look very cheap on earnings based measures. But it is trading at decent discount to book value and the team have strong track record so wouldn't bet against them. Should also benefit from higher rates.

rmillaree

Ra International (LON:RAI)

Hello Richard

Thanks for adding that useful info - yes that probably mostly explains the drop in orderbook - i would say they were very unlucky with the events that have unfolded in Mozambique and it is probably to their credit things didnt turn out worse than they have done this year end (caveat full results not seen yet) - shoott happens simply put. In some respects i applaud the fact that they don't back away from these dangerous areas (presuming they are honest and transparent in dealings when other may not be as much) - certainly as a holder i was fine with the whole risk profile here - for pe or 3 , 4 or 5 as this company has been in the past it aint all gonna be a bed of roses.

Viz

This is one of the reasons I really like this place. I held for years until last year, sold out after seeing some distribution issues. No idea that it had dropped this far and taken a medium stake here. In fact I also bought back into £boo this week given that it was under £0.90, that’s just plain wrong in my view - especially seeing as my 44 year old partner has just started buying things from there for cheap holiday wear. Previously she was a Debenhams type gal, seeing her move to Boohoo gives me confidence that others will too.

I agree!

Small Cap Value Report (Weds 16 Feb 2022) - FLTA, FRAN, RAI, OOUT, ARBB

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Jack Brumby

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